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Why Would Your Government Want Your Gold?

Why, really? It has its own bullion reserves. According to officials, gold isn't all that and currencies are vogue. So why would governments ask citizens for their private gold? Let's dive into two cases, historical and current.

1933: Roosevelt nationalizes private U.S. gold

The first is when President F.D. Roosevelt didn't ask Americans for gold, but rather took it in 1933. It came after several years of the public trusting the dollar less and less and literally hoarding gold. They instinctively understood that physical gold coins were a superior form of money than ornately-decorated green paper. This threatened the supremacy of the U.S. dollar, or at least threatened the “full faith and credit of the of the United States.”

The presidency would have none of that. See, only paper money can be devalued by executive decree. Back in the 1930s, every paper dollar was still backed by physical gold. If the government had more gold, they could print more dollars. Roosevelt wanted to flood the nation with money, to stimulate the economy and hopefully shake off the Great Depression. So here’s what he did:

  • Executive Order 6102 outlawed private ownership of gold coins, gold bullion and even “gold certificates” (old banknotes in circulation that still were exchangeable on demand for gold coins). Citizens were instructed to swap their gold coins for paper money.
  • Pass the Gold Reserve Act, which changed the price of gold from $20.67/oz to $35/oz
  • That alone devalued the dollar by some 70%
  • Which enabled the Treasury Department to print and circulate 70% more money

By the way, U.S. citizens were prohibited from owning gold coins and bullion for over 40 years. (Some BullionMax customers are surprised to learn gold ownership is actually legal.)

But once President Nixon completely abandoned any notion of tying the dollar’s value to gold, and gold’s price was set by the market? Then there was no reason to keep the prohibition in place.

Roosevelt took away gold because he thought he needed it to print more money. By Nixon’s time, Federal Reserve bureaucrats realized they didn’t need gold, they could just print as much money as they wanted! Roosevelt was implementing a very old-fashioned approach to what we’d call Quantitative Easing (QE, or money-printing). Today, Fed officials can unleash trillions of dollars without even getting up from their desks. That’s progress for you…

If you ever look at a gold price chart and wonder why the line has such a reliable tendency to go up, there’s your answer. Gold is a finite resource. Dollars are not.

In fact, no unbacked currency is a finite resource. Ask the citizens of Turkey…

2022: Turkey asks citizens to voluntarily surrender their “under-the-mattress” gold

And then there is the case of Turkey and the lira. If you’re not up to speed on this, you’re certainly not alone… Turkey is currently suffering one of the worst inflationary cycles in the world. This month, inflation is expected to top 50%. Their currency, the lira, lost 44% of its value in 2021 because the Turkish central bank refused to raise interest rates. They said that raising rates actually causes inflation.

Hilariously, President Recep Tayyip Erdogan has been telling his citizens for months that the soaring inflation figures were “just temporary” – sound familiar?

There are many views on why Erdogan is doing what he's doing with the economy, ranging from critical to extremely critical. It’s not something we need to discuss further. As always, it's the everyday person and their experiences that concern us.

A little more background first, though…

Mises' Doug French delivers an anecdote from a visit to Turkey a decade ago, when the economy was booming. Turks back then, as ever, were a skeptical bunch, aware and suspicious of government policies. They’d seen too much to trust too much. Consequently, they mostly scorned banks and instead stored their wealth in gold. They literally call it “under-the-mattress gold.” That’s a pretty clear picture! Just say those words and you know exactly what they're talking about.

Following a year that saw the currency depreciate 44% against the dollar and prices rise 50%, you have to admit that habit of stashing savings makes a great deal of sense!

The newly-appointed finance minister Nureddin Nebati has a not-so-new idea on how to fix the country's economy:

Loyal Turkish patriots, your nation needs your gold!

Seriously, he’s asking the people to hand over their private gold stocks to the very government that’s completely torpedoed the nation’s economy.

Nebati figures that residents have around $350 billion in physical gold stashed under their mattresses, buried in the back yard and maybe at the bottom of a nearby pond. It’s almost a populist central bank with its own 5,000-ton gold bullion reserve.

Nebati’s asking these loyal Turkish patriots to exchange at least 10% of their emergency financial safety net for the rapidly-depreciating lira. Keep in mind, this is a time when gold is approaching all-time highs in every currency on the planet. Nebati explains that 1,500 jewelers nationwide have been contracted for this system, which is designed to safely store citizens' gold which – and this is the best part -- can be retrieved at any time.

“Retrieved” in this context probably means, “You have to buy it back from us and you have to give us more money than we gave you (inflation, what can we say?)”

You can tell Nebati’s a politician, rather than an economist, because he’s making this request with a straight face.

Here’s the thing, and it sort of exposes the pyramid-scheme behind the lira (and by extension, all unbacked currencies):

  • The Turkish Central Bank already has a gold stockpile, about 394 tons
  • …but that’s not enough, even combined with their other assets, to convince investors that the lira has much value…
  • …so the finance minister goes on TV with his hat in his hands, begging for gold donations…
  • …which, best-case scenario, would bolster the value of the lira, and help get inflation under control…
  • …and worst-case scenario would simply vanish. (But at least you’d have some souvenir lira notes suitable for framing.)

Now, for which party in this transaction is this a win/win scenario? The Turkish central bank! They get more gold for the national reserve, and, remember, they can keep printing lira to buy the gold from their citizens.

We can’t imagine many of those cautious, bullion-hoarding Turks are going to fall for this absurd offer. At least for now, this is a voluntary program. Hopefully, no matter how desperately the government needs more gold, they’ll avoid coercion (legal or military).

Here are the take-aways:

The government knows that gold is money, and better money than the paper notes it prints.

The government would never dream of parting with its own gold bullion stash! That would reduce its standing as a sovereign nation.

So here’s our (not legal!) advice, for today and the future: If any government representative asks you to donate, or contribute, or otherwise hand over your private gold? Simply shrug and say, “What gold?”

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